 On Using Equities to Produce Pension PayoutsGiovanni Barone Adesi, Eckhard Platen () and Carlo Sala No 413, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney Abstract: Is it possible to achieve almost riskless, nonfluctuating investment payoffs in the long run, at a fraction of the traditional funding requirement, using equity investments? The persistence of low interest rates is spurring research on this question because of the need to increase yields, while limiting the variability of investment results. Payouts of savings account units aim to achieve an almost riskless outcome over a long horizon. We show that they can be managed as contingent claims and, when denominated in units of a stock index, less expensively than under classical risk-neutral assumptions. To assess the robustness of the proposed hedge portfolios, we introduce a simple overfunded scheme and show its reliability using bootstrapping. The results show that by applying an overfunding of 6%, the probability of not achieving the target is less than 1%. At the heart of this result are the mean-reversion and the leverage effect of the minimal market model, together with the supermartingale property of the benchmarked savings account. Keywords: Hedging; locally riskless payout; dynamic investment policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:413 Access Statistics for this paper More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC. |
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